When you think about your finances over the course of a lifetime, it is easier to see that risks may only be selected, not avoided.
Our first understanding of risk often relates to fluctuations in value. If you put in a dollar, and the value soon drops to 80 cents or 60 cents, it seems like a clear (and vivid!) loss.
Money buried in a can would never have that kind of risk, yet its purchasing power—what you could buy with it—declines year by year if there is any inflation at all. This kind of damage reminds us of termites, which chew away behind the scenes, causing damage that is not obvious.
Longer term fixed income investments, like bonds, offer interest that may offset inflation in whole or in part. But the value of a bond may change with interest rates. A 3% bond is probably not going to be worth its face amount in a 6% world.
The interesting thing about all these different kinds of risks is that they cannot be entirely avoided, but they may be balanced against each other.
• The things that fluctuate in value may provide growth over the long term to offset inflation.
• Having money in hand when needed may enable us to live with fluctuating values in other parts of our holdings.
• Reliable income helps us avoid excess amounts of money laying around.
We think one of the most valuable lessons about risk is that, on our long term investments, volatility is not risk. If we aren’t retiring for many years, ups and downs in our retirement accounts may not be all that pertinent.
The stock market, measured by either the Dow Jones Average or the S&P 500 Index, has risen three years out of four. There is no guarantee that this general pattern continues, or how results will work out over future periods. But someone that invested ten, twenty or forty years ago may have seen a lot of growth overall, in spite of fluctuations ever year—and some years that were negative.
Clients, if you would like to talk about the balance of risks in your situation or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted.